Ten Lessons from the Front Lines of Quebec's Fight Against Carbon

the solutions series INSIDE NORTH AMERICA’S LARGEST CARBON MARKET Ten Lessons from the Front Lines of Quebec’s Fight Against Carbon Pollution Sources Introduction We conducted all of our interviews Policy Developers In 2012, Quebec became the first Canadian These interviews focused on a few key questions province — and only the second jurisdiction that dug into the politics and process of confidentially, and we assured Line Beauchamp* interviewees that their specific Ministre du Développement durable, de l’Environnement in North America — to enact a cap and trade adopting a cap and trade system: et des Parcs, Province of Quebec system for greenhouse gas (GHG) emissions comments would not be attributed • What motivated the development and Jean Charest* under the Western Climate Initiative. When to them by name. However, some Premier, Province of Quebec introduction of a cap and trade system in the province formally linked with California’s Quebec? participants opted to put some or all system on January 1, 2014, the partnership Government Policy Advisors of their comments “on the record.” became the most comprehensive carbon trading • What are the key policy-design decisions that Claude Côté All ten interviews were conducted 1 governments considering such an initiative Conseiller, Bureau des changements climatiques system in North America. While the market by telephone. Ministère du Développement durable, de l’Environnement has only just completed its second joint auction, would need to make? What are the pros and et de la Lutte contre les changements climatiques, we wanted to explore the lessons the province cons of these choices? Province of Quebec learned in developing and implementing what is • What kind of response might governments Expert Commentators now the continent’s largest carbon market. expect if they introduce this kind of policy, and Erick Lachapelle During the fall of 2014 and earlier this year, how can governments ensure that the response Professeur adjoint, Directeur du programme en économie Clean Energy Canada conducted a series of is as favourable as possible? et politique, Université de Montréal confidential, candid interviews with the policy’s Karel Mayrand We’ve distilled our findings from these Director General for Quebec and Atlantic Canada with the architects and with expert observers who have interviews down to ten key takeaways focusing David Suzuki Foundation, and chair of Al Gore’s Climate watched its development and implementation. on the development of Quebec’s cap and trade Reality Project in Canada We spoke with elected representatives and system under the Western Climate Initiative. Mary Nichols officials working in Quebec’s government at the 2 Chair, California Air Resources Board Together with our assessment of British time, and experts from the business, academic, Jean Nolet Columbia’s Carbon Tax, we have provided a President, ÉcoRessources and environmental communities within comprehensive look at how existing carbon the province. We also sought commentary Vincent Pouliot pricing systems operate and how they can serve Chef de service - Marché du Carbone et Efficacité from California — Quebec’s carbon market as useful lessons for jurisdictions considering énergétique chez Gaz Métro partner — to provide an inclusive look at the adopting such a system. Hugo Seguin players intimately involved in shaping and Fellow, Centre d’études et de recherches internationales The key findings from our interviews are responding to this ground-breaking policy. de l’Université de Montréal (CÉRIUM) summarized on the next page and described in Katie Sullivan more detail in the pages that follow. Questions Director, North America & Climate Finance, IETA posed to interviewees are included in Appendix A. *Title as of 2008, when the carbon tax was introduced. 1 Klinsky, Sonjia (2013). Bottom-up policy lessons emerging from the West- 2 How To Adopt a Winning Carbon Price: Top 10 Takeaways From the Architects ern Climate Initiative’s Development Challenges. Climate Policy, Vol 13. No2. of British Columbia’s Carbon Tax, Clare Demerse, Clean Energy Canada, 143-169. February 2015. Available at cleanenergycanada.org. 2 3 Top 10 Takeaways Considering a cap and trade system? Here’s what you really need to know. 1. You’ll need strong political leadership and a citizenry primed for climate action. 6. Commit to openness, 2. Partner with other jurisdictions to fairness, and transparency. create new opportunities and lower the “cost” of participation. 7. Address competitiveness concerns with a home-grown approach. 3. Invest in education. Develop in- house expertise, and learn from others. 8. Design your system to support economic success. 4. Take the mistakes of others, fix them, and turn 9. Don’t expect your cap and trade system to them into benefits. do everything; consider it one component of a full suite of climate policies. 5. Invest auction revenues in tangible climate 10. Get ready for the solutions. global spotlight. 4 5 A Cap and Trade Primer The mechanics and impacts of Quebec’s cap and trade system • The final sale price of each emission unit auctioned is • Beginning in 2015, in order to encourage GHG reductions, On January 1, 2013, Quebec took a bold step toward fight- companies/entities that are part of the market. If the emis- the lowest price bid for which the last emissions unit is the number of free units decreases at a rate of one to two ing climate change by launching a cap and trade system sions are greater than the allowances allocated, then the awarded.8 percent per year. under the Western Climate Initiative’s (WCI) carbon market. company must purchase allowances from those who have A year later, when Quebec linked its system with California’s, them for sale, at auction, or acquire offsets (see below). If • In Quebec’s cap and trade system, trading period is • Electricity and fossil fuel distributors don’t receive free it created North America’s largest carbon market. the company does not have enough allowances or offsets referred to as the “compliance period”. Allowances are allocations. to cover their emissions, the regulator will impose penalties. allocated and auctioned within this period.9 While it is too early to draw conclusions on Quebec’s long All proceeds of the auction of units go into Quebec’s “Green • The price per unit from the last joint auction held in term economic performance under the cap and trade Surplus allowances are traded and priced according to sup- Fund” to finance various initiatives outlined in the province’s February 2015 was $12.21/tonne. system, a great deal remains to be learned from how the ply and demand. As the regulator gradually lowers the cap 2013 - 2020 Climate Change Action Plan. These include public system came together. Quebec is the first subnational juris- on emissions, fewer allowances are available. This creates • Compliance periods last three calendar years each as of transit, research and innovation, green energy, and dealing diction in Canada to develop a cap and trade system, and a demand for allowances, which increases their value or January 2015 (2015-2017, 2018-2020, and so on). Rules with residual municipal solid waste.14 the first in Canada to do so under the Western Climate Ini- price. Over time, industries that use carbon-intensive tech- pertaining to the free allocation of allowances are only set tiative. Thus far, the system has also survived two changes nology will find it more economical to upgrade to lower- by regulation until 2020. All allowances have to be surren- in government.3 carbon technology to reduce their need for allowances. dered by the first of November following the end of the compliance period.10 What is cap and trade? What is an offset? What does the system cover? Cap and trade is a form of market regulation applied to Offsets are initiatives undertaken by non-regulated indus- greenhouse gas (GHG) emissions. tries that reduce or remove greenhouse gas emissions, and • Persons or municipalities operating a facility with annual which can be sold to emitters to help meet their compli- GHG emissions greater than or equal to 25,000 tonnes of The “cap” puts a limit on the maximum amount of GHGs ance obligations. To be eligible as an offset, the regulatory equivalent carbon dioxide a year.11 that can be emitted, which is then translated into a number authority must validate projects. In Quebec and California, • The system covers close to 85 percent of Quebec’s GHG of allowances. Allowances can be distributed free to some offsets are limited to eight percent of the compliance emissions. At its outset in 2013, this included the indus- or all covered entities or auctioned to highest bidders within obligation. trial, manufacturing, and electricity-generating sectors. a competitive bidding process; each emission unit usually 3 The Liberal Party formed government from 2009 - 2012, the Parti In 2015, coverage expanded to include GHG emissions represents one tonne of GHG.4 Companies must match Québécois from 2012 - 2014, and the Liberal Party from 2014 - present How does it work? related to the use and combustion of fossil fuels that are their emissions to their allowances. Over time, the overall 4 http://www.ieta.org/index.php%3Foption%3Dcom_content%26view%3D 12 • In Quebec’s system, sectors perceived as trade-vulnerable sold or distributed. article%26catid%3D54:3-minute-briefing%26id%3D205:cap-%26-trade- cap is lowered, leading to reductions in GHGs. basics receive emission allowances free of charge. These sectors • In addition, the cap and trade system is open to individu- 5 http://www.mddelcc.gouv.qc.ca/changements/carbone/documents- The “trade” creates a market for emission or carbon include: aluminum, lime, cement, chemical and petro- als or entities that would like to participate in the carbon spede/technical-overview.pdf allowances. A company that is part of a capped sector must chemical industry, metallurgy, mining and pelletizing, pulp market, even when there is no regulatory obligation for 6 http://www.mddelcc.gouv.qc.ca/changements/carbone/documents- 5 spede/in-brief.pdf report its total emissions.

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